Updated: Leagues as Team Owners and Operators

In light of yesterday’s trade/non-trade of Chris Paul from the Hornets to the Lakers, I feel the need to re-publish my take on the inherent conflicts of interest that arise from having a franchise owned and operated by a league. I’ve heard and read several different arguments over the merits of this trade and why it should have been allowed, including:

  • The Hornets got back a lot of talent and it was a fair package for Paul.
  • The Hornets have a GM in place that is keeping the best interests of the team in mind.
  • Paul wasn’t going to sign an extension with the team, so it’s best for them to make a trade.

The actual reason why the trade wasn’t allowed to go through is unclear. The “official” statement was that the Hornets decided against it, but in reality, there has to have been a decision at the league level, which makes sense because…THE LEAGUE OWNS THE TEAM! General managers have to report up to the team owner, and in this case, the team owner is the group of all 29 other team owners. If those team owners do not want the trade to go through, whether or not the reasons are justified or completely selfish in nature, then the trade cannot go through.

Update: For all those people who feel that David Stern either made this decision himself or shouldn’t have “allowed” this veto to happen (cough, cough, Bill Simmons), his bosses are the other 29 team owners. For all of his authority, he still has to listen to them, even if he disagrees with them.

Clearly, this is a gigantic conflict of interest, and it’s a big reason why situations like this should be prevented at all costs. It affects both team decisions (trades, signings, contracts) and business decisions (television contracts, relocations, sponsorships). I wrote about this earlier this year with regards to the Los Angeles Dodgers, and I also include other examples with the Texas Rangers, Montreal Expos, and funny enough, the New Orleans Hornets.

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By now, you’ve probably already seen the news that Major League Baseball has taken control of  day to day operations of the Los Angeles Dodgers away from current team owner Frank McCourt. Instead of trying to weigh in on whether MLB’s decision in this case was right or wrong and what McCourt should or shouldn’t do, I’d like to take a philosophical look at the concept of a league-owned or league-operated franchise. This situation has come up a few times in professional sports over the past decade, including the Texas Rangers, the Montreal Expos/Washington Nationals, the New Orleans Hornets, the Phoenix Coyotes and now the Dodgers. While the circumstance behind each situation is different, there are some fundamental issues at hand any time a league steps in to manage an individual franchise.

If a league owns or operates an individual franchise, in essence the other 30+ owners within that league are now in charge of that team, since the league itself is owned equally by all of the separate team owners. While each owner is primarily concerned with their own franchise, even having a 1/30th stake in another team is a significant investment. This additional “ownership” can represent a unique conflict of interest for those put in charge of the team’s operations.

The owners want this franchise to be run profitably, but what is the best way to do that? Often times, the best way to generate a short-term profit is through reducing costs, whereas long term profit is more sustainable via investing in the team’s operations. If the other owners care more about the short-term, which could easily be the case since they theoretically won’t own the team for long, then those in charge may be forced to cut costs. In addition, the specific approaches the team takes in their operations could be dictated by that league’s revenue sharing system. If more revenue is shared from ticket sales that local media, will those in charge be forced to focus more on that specific revenue stream to the detriment of the other.

This problem is even more significant when looking at the on-field operations of the team. Those in charge should theoretically continue to do what they can to help the team win, since that will in turn lead to more revenue. However, if that team wins more games, logic dictates that other teams will lose more games, which can decrease revenue for those team owners. This question came up last year with the Texas Rangers. The team was doing well, but until new ownership was in place, the team seemed unlikely to make any roster changes. A more recent example took place this year with the Hornets, when those in charge of the team did make a significant trade in an attempt to improve the team. Mark Cuban spoke out vehemently against this trade in particular because the team took on additional salary, which mean as a partial owner of the Hornets, Cuban could end up losing more money. He didn’t seem upset about the team’s attempt to improve (he said that he wouldn’t mind the trade if they hadn’t taken on additional salary), but I wouldn’t be surprised if behind the scenes, other owners were angry about this aspect as well.

Finally, you also need to look at the context under which the league steps in. One of the most unusual arrangements was when MLB decided not only to “purchase” the Expos, but also arrange for the sale of the Marlins to former Expos owner Jeffrey Loria, and in turn the sale of the Red Sox to former Marlins owner John Henry. While I will not attempt to analyze the various motivating factors behind these deals (how often do you see owners “trade” their team?), there’s no doubt that Henry and Loria benefited greatly from the situation, while the “rest” of the league ends up owning the orphaned Expos, which surely had a negative cash flow until the time they were sold as the Nationals. Again, there does seem to be some conflict of interest when other owners end up having to support the operations of an additional team as part of another owner’s franchise purchase and sale.

Even putting that unique situation aside, other events will continue to arise where a league has no choice but to step in and own or operate a franchise. It is clearly in the best interest of any professional sports league to make sure all of its teams can operate successfully. The conflicts that these situations present are real, and must be delicately managed by all parties involved until operations can be turned back over to the team, hopefully as quickly as possible.

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